DUTY DRAWBACJK CUSTOM LAW 1962

Duty Drawback is governed by a couple of sections in the Customs Act, 1962 namely
Sec.74 and Sec.75. The common intention is apparently to refund the import duty borne by
the importer on exporting the goods. One (Sec.74) being for duty drawback on re-export
back in specie and the other (Sec.75) for duty drawback on imported Materials used in
Exported product. Importing of Raw materials and manufacturing finished Goods only to
export out of India is omnipotent and Sec.75 presents a heavy relief to these manufacturer-
exporters. Sec.74 is an occasional phenomenon Under Sec.75 the goods that are eligible
are 1) those on which manufacturing or processing takes place and 2) those on which any
operation is carried out. The words ’on which any operation is carried out’ would mean that
even those non value adding activities that are incidental or ancillary to the main
manufacturing process are also considered for e.g. a specific packing. If it is a packing
material that is being imported, there is a choice to the exporter to avail the benefit of
Sec.74 (by proving the Commissioner on the specie export under packaged condition) or
Sec.75. But then the very obvious alternative is Sec.75 which gives 100% duty drawback
rather than Sec.74 which gives only 98% of duty drawback with onus of proofs on assessee
and many other practical difficulties. In Sec.75, the words “being goods which have been
entered for export and in respect of which an order permitting the clearance and loading
thereof for exportation has been made under......” clearly require that the order for clearance
of export is required as a prerequisite to make an application for Duty drawback. In USA the
sale of Drawback rights is made legitimate to permit companies not exporting any goods to
transfer the right to an exporter to enable him claim the drawback. This is similar to our Duty
Entitlement Pass Book Scheme. But here in India we do not have such facility. Consider the
case of a last sale preceding the export, where the manufacture procures imported
materials and transfers the stock to an overseas distributor. There is no way the
manufacturer can claim duty drawback of the import duty since the Bill of entry and hence
the order permitting export clearance will be in the name of the distributor and not the
manufacturer. If there had been a facility to transfer Duty drawback rights or some scheme
like DEPB the manufacturer can probably claim the drawback. In this context the above
words assume utmost significance. The amount of drawback available under Sec.75 is “the
duties of customs chargeable under this Act on any imported materials of a class or
description used in the [manufacture or processing of such goods or carrying out any
operation on such goods”. Shouldthere be a question what will happen if due to some
reason there is a remission of duty from Government? The answer is cleverly replied in the
subsequent clause (2a) of the section. It says that the Central Government shall make rules
among various other aspects to allow drawback of the amount actually paid by the
manufacturer for carrying out the purposes of the act. It is relevant to note that as per
Circular No.41/2005, drawback is not to be denied when duty is paid through DEPB
scheme. The duty drawback for many industries is fixed based on a trend of average import
material consumption and incidence of duty which is popularly called as ‘Brand Rate’
fixation. Extra Duty Deposit recovery under Customs act 1962 (Valuation Rules) is a
frequent occurrence nowadays with the advent of Globalisation and off shoring. Branches of
MNCs in India which import materials and components from their Parent company are very
consistently demanded an Extra Duty deposit which as per law ranges from 1% - 5%. Extra
Duty Deposit (EDD) is nothing but a result of investigations into the Cross border transfer
pricing. EDD is collected by way of provisional assessment and depending upon the final
order passed by the SVB (Special Valuation Branch which investigates the Invoicing) the
deposit is either converted to Duty or refunded back to the assessee. When a Brand rate is
fixed for an Industry as per Sec.75, there could be problem for a manufacturer to claim the
Extra Duty deposit if any paid under a provisional assessment.

There are two reasons for this

1. Provisionally assessed Duty cannot be claimed as a duty drawback until the final
assessment (Refer Sec.18 (5) (e)). Also the usage of words ‘duties chargeable’ supply
adequate inference.

2. A Brand Rate fixation is claimed to be based on normal transaction value and

consumption of material. Hence on a final assessment of the EDD as Duty payable, the
department will argue that the EDD is a normal duty on the Normal Transaction value which
is already factored in fixing the ‘Brand Rate’. In which case it becomes an uphill task to
claim drawback of the EDD paid. Though there is no circular issued with regard to (2)
above, Circular No.19/2005 issued by CBEC throws caution to the wind. It states that Duty
drawback should not be reduced because of usage of some duty exempted goods in
production and while deciding so it reasoned that drawback is already calculated normal
consumption of such duty free items as well. If this is possible, then department can rake up
the same argument for EDD drawback as well.

The export proceeds have to be received in India within the time permitted by FEMA act
and FOB Price of exports should not be less the value of imports. For SEZ netting of foreign
currency receivables and payable is permitted. Hence they will have to be careful in
resorting to Duty drawback.

This apart, there are powers to the Central Government conferred under this section to
specify by way of rules as to how much is the percentage of a specific imported material in
a particular exported product on which duty drawback is available. In doing so, it is the duty
of Central Government to ensure consistency with the relevant ‘Tariff reduction’ agreements
with other countries. This is because these agreements spell out the required percentage of
‘Regional Value Content’ in the exported commodity to obtain the Certificate of origin. This
Certificate is the proof for claiming concessional tariffs under the agreement. If there is lack
of consistency in this regard it will become a ‘Catch 22’ sort of situation for the exporter.
Overall, there is no Drawback in the Duty drawback provisions.

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Refer by : V.SURESH